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The Teaparty Republican Deficit in Understanding

A question that has puzzled me for some time is whether right-wing ideologues actually believe their own nonsense about economics, or whether it's just Frank-Luntz-esque political sloganeering.

As Matt Miller wrote in the Washington Post last month:

You can feel the Republicans’ pain; tax cuts have been the party’s defining issue since Ronald Reagan rode them to power in 1980. But in an aging America, the numbers no longer work, and Republicans have failed to develop a new conservative vision to replace their fading mantra.

Take "cap, cut, and balance,: for instance, passed by the House in July, which would cap federal spending at 19.9% of GDP by 2018, and lower it to 18% over time.

"... [M]athematically and politically unattainable," says Miller.

If there’s one fact you need to emblazon in your mind to make sense of the current debate, it is that Ronald Reagan ran the federal government at 22 percent of GDP back when our population was much younger. (Under President Obama, the extraordinary measures enacted to fight the recession – plus a collapse in the denominator, GDP -- have boosted spending to around 24 percent, while revenue has dropped to 15 percent from its 18-19 percent longtime average).

It is simply not plausible to argue that as we double the number of seniors on Social Security and Medicare, Uncle Sam will be able to operate at spending levels 10 to 20 percent below those over which America’s modern conservative icon presided.... Today there’s no question: Taxes must rise.

As a percentage of GDP, spending under Reagan was never under 21.3%, and reached a high of 23.5%. In 1988 Reagan signed a major expansion of Medicare. His military buildup, sometimes credited with winning the Cold War, would have been impossible under "cap, cut, and balance."

Republican rationale, if it qualifies as such, for the magic 19.9% target, according to the Wall Street Journal, is that it is based on average spending levels over the last 30 years. Says Miller: "The average spending levels of the last 30 years are irrelevant because we weren’t retiring 76 million baby boomers over the last 30 years. And decades ago per capita health costs for seniors were far smaller than they are today."

Pre-empting conservative characterizations as another "tax and spend liberal," Miller notes that he has consistently advicated entitement reforms and "has the arrows" from his friends to prove it.

Republican doctrine has banned honest math.

Aversion to honest math explains why the Ryan budget embraced by the GOP doesn’t balance the budget — even after Medicare changes that may prove fatal to the party -- until the 2030s and racks up at least $14 trillion in debt between now and then.

That’s because the Ryan budget cuts taxes. Balanced budget math in an aging America doesn’t work without higher taxes.

Miller doesn't rule out cutting taxes in the short term to boost the economy, but the core question for the long term, he suggests, is "Once the economy has more fully recovered, how do we lift taxes to fund the boomers’ retirement in ways least harmful to economic growth?"

But we can’t even get to this conversation until Republicans relinquish the fantasy that we can keep cutting overall taxes as America ages.

At bottom, this fantasy masks fear. Republicans’ refusal to let go of the old time religion shows how little work the party has done to craft an agenda equal to America’s current challenges. The party has abandoned problem-solving for brand preservation. If tax cuts aren’t our defining issue, Republican pols ask themselves, what distinguishes us from Democrats? Why should voters choose us?

In a May 9 speech to the Economic Club of New York, Boehner claimed that government spending "is crowding out private investment and threatening the availability of capital."

"Look at interest rates. Look at capital spending," said Nariman Behravesh, chief economist of IHS Inc., a research firm based in Englewood, Colorado. "It’s very hard to come to a conclusion that there’s any kind of crowding out."

The cost of borrowing is low, by historical standards. Corporate borrowing is cheaper now than a year ago.

The TED spread, the difference between what banks and the U.S. government pay to borrow for three months, fell 2.2 basis points since May 9, the biggest drop since April 5. A narrowing spread means banks are more willing to lend.

The US Commerce Department reports that business investment in equipment and software increased more than 15% last year, and was up more than 11% (annualized) in the first quarter of 2011.

Boehner also asserted that the 2009 stimulus program "hampered job creation." The statement is inconsistent with findings of the non-partisan Congressional Budget Office (CBO), that the stimulus package increased unemployment by 1.4-3.3 million, and reduced unemployement 0.7-1.8%.

Boehner's claim that Republican plans to privatize Medicare would give participants "the same kinds of options that members of Congress currently have" was also contradicted by the CBO. CBO projections found that the Republican plan would cover 32% of health care costs for a typical 65-year old. The government pays as much as 75% of health care costs of federal workers, according to a US Office of Personnel Management handbook.

Boehner criticized a 1990 budget deal that included a tax increase, claiming that it resulted in a recession that was remedied only by a balanced budget later in the decade. Boehner neglected to mention that a tax increase in 1993 raised the top individual rate to 39.6 percent. It remained at that level until 2001, and in 1998 the first federal surplus in almost 30 years was recorded. From 1994 through 2000 the US economy grew at an average rate of between 3 and 4 percent.

Finally, Boehner blamed "the whole meltdown” of the U.S. financial system on government mortgage companies Fannie Mae and Freddie Mac. All but one member of the congressionally appointed Financial Crisis Inquiry Commission came to a different conclusion. The Democratic majority found that Fannie Mae and Freddie Mac "participated in the expansion of subprime and other risky mortgages, but they followed rather than led Wall Street and other lenders in the rush for fool’s gold." Three out of four Republicans on the commission wrote in the Wall Street Journal that blaming the crisis on government intervention was "misleading," and cited ten factors that contributed.

Washington has been operating the past few months under the assumption that the United States and our euro-zone economic trading partners are experiencing a debt crisis that must be resolved by exorcising excessive spending in the near term. To Republicans, and even many co-opted Democrats, the debate starts with spending cuts and how much must be done to appease voters and the markets, both now and in November, when the "Gang of Twelve" committee that resulted from the debt-ceiling deal potentially follows through with its mandate.

This, Gross asserts, confuses cause and effect.

... [W]hile our debt crisis is real and promises to grow to Frankenstein proportions in future years, debt is not the disease — it is a symptom. Lack of aggregate demand or, to put it simply, insufficient consumption and investment is the disease. Debt has been simply an abused sovereign sovereign and private market antidote to sustain it.

Calling it a "potentially fatal disease of capitalism," Gross points to three secular (i.e. cyclical) factors that have contributed to declining demand.

Aging demographics, where boomers everywhere spend less, in contrast to their youth, as they approach retirement.

Globalization, where 2 billion new competitive workers from Asia and elsewhere take jobs and paychecks from complacent and ill-trained 40-somethings in developed markets.

As the entire world strives to put its own people to work before other nations do, policymakers constructively lower interest rates and delay sovereign, corporate and household defaults to provide breathing room. Fiscally, however, an anti-Keynesian, budget-balancing immediacy imparts a constrictive noose around whatever demand remains alive and kicking. Washington hassles over debt ceilings instead of job creation in the mistaken belief that a balanced budget will produce a balanced economy. It will not.

... [p]olicymakers from a fiscal perspective are pointing us toward recession and the destructive 1930s instead of a low-growth but still breathing U.S. economy of the 21st century.

Comments

The boasts of Congressional Republicans about their cost-cutting victories are ringing hollow to some well-known economists, financial analysts and corporate leaders, including some Republicans, who are expressing increasing alarm over Washington’s new austerity.